Many business owners recognize the threat of losing a key person and ultimately protect their businesses with key man insurance. But more often than not, they fail to see a golden opportunity to create value by combining the idea of retirement planning and key man life insurance.
The most basic use of key man or key employee life insurance is to protect your company in the event of the untimely death of a major contributor to the “bottom line”. However, an often overlooked use of key man life insurance is to provide supplemental retirement benefits to YOU, the business owner.
In this case, key man life insurance serves a dual purpose. In addition to protecting the company, a cash value life insurance policy can ensure that money is available at a future date to supplement retirement. If key man life insurance is properly structured, it may provide an attractive addition to your retirement package.
How It Works
When a company purchases key man insurance, the business typically owns the policy, pays the premiums, and is the beneficiary. When incorporating retirement planning and key man life insurance, there are several strategies constructing the plan.
The company can bonus the money to the key person or business owner and have them own the policy and name their own beneficiary. This option is known as the executive bonus arrangement and there are advantages and disadvantages to this type of structure. Additionally, there are other options such as a non-qualified deferred compensation arrangement.
This strategy is a bit more complicated but essentially has the company purchasing and owning a policy on the key person and includes a vesting schedule where the cash values are “vested” to the key person over time.
Types of Policies
Several different policies can be used to provide supplemental retirement benefits to key executives and business owners including whole life insurance, universal life insurance, indexed life and variable universal life insurance. The business owner’s needs, risk profile, and aggressiveness in terms of investment all play a role in deciding which policy is best.
Benefits to the Employee
One of the biggest benefits of linking retirement planning and key man life insurance is that any cash accumulated inside the policy grows tax deferred. One vested, the key person can pull out money tax-free through loans and withdrawals. This can provide a fantastic supplement retirement income.
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Benefits to the Company
When a company pays premiums into a permanent (non term) key man insurance policy a cash surrender value begins to accumulate over time. This cash value can be counted as an asset on the balance sheet and used for a variety of business purposes such as meeting cash flow needs, collateral for securing a loan or supplementing retirement programs.
